{"id":119088,"date":"2025-08-25T00:39:42","date_gmt":"2025-08-25T00:39:42","guid":{"rendered":"https:\/\/arielle.com.au\/?p=119088"},"modified":"2025-08-25T01:17:44","modified_gmt":"2025-08-25T01:17:44","slug":"liquidity-ratio","status":"publish","type":"post","link":"https:\/\/arielle.com.au\/liquidity-ratio\/","title":{"rendered":"Ultimate Guide To SMB Liquidity Ratios"},"content":{"rendered":"<span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Reading Time: <\/span> <span class=\"rt-time\"> 5<\/span> <span class=\"rt-label rt-postfix\">minutes<\/span><\/span>\n<p>Not being able to pay your business\u2019 bills on time is a bad look. You\u2019ll lose credibility with vendors. Your credit score will suffer. How do you prevent this? You start by knowing your liquidity ratios.<\/p>\n\n\n\n<p>A recent review by the Reserve Bank of Australia has identified \u201can extended period of cashflow difficulty, leading to an inability to repay debts\u201d as a common denominator behind company insolvencies.<\/p>\n\n\n\n<p>Yes, times are tough for business. <\/p>\n\n\n\n<p>But the RBA notes that:<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span> \u201cWeak economic conditions exacerbate underlying issues with a firm\u2019s business model or management.\u201d<\/span><\/div><\/div>\n\n\n\n<p>The good news? You can tackle underlying issues that could lead to a cash flow crisis.<\/p>\n\n\n\n<div class=\"wp-block-uagb-image uagb-block-da431463 wp-block-uagb-image--layout-default wp-block-uagb-image--effect-static wp-block-uagb-image--align-none\"><figure class=\"wp-block-uagb-image__figure\"><img decoding=\"async\" srcset=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/08\/why-do-businesses-fail-1024x791.jpg ,https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/08\/why-do-businesses-fail.jpg 780w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/08\/why-do-businesses-fail.jpg 360w\" sizes=\"auto, (max-width: 480px) 150px\" src=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/08\/why-do-businesses-fail-1024x791.jpg\" alt=\"\" class=\"uag-image-119123\" width=\"1500\" height=\"1158\" title=\"why do businesses fail\" loading=\"lazy\" role=\"img\"\/><\/figure><\/div>\n\n\n\n<p><em>Above: Inadequate cash flow is the #1 killer of Australian businesses.<\/em><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What Is A Liquidity Ratio?<\/strong><\/h2>\n\n\n\n<p>Can you cover your business\u2019 debts in the short-term, using cash and other liquid assets on hand? <\/p>\n\n\n\n<p>A liquidity ratio helps you answer this question.<\/p>\n\n\n\n<p>If you\u2019ve got more liquid assets than payments due in the coming year, that\u2019s a healthy sign for your cash flow.<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Liquidity<\/strong> refers to how easily you can convert assets into cash to meet your business\u2019 day-to-day expenses. For instance, in addition to the money in your business\u2019 transaction and savings accounts, you might hold a stock portfolio that could be sold quickly to access money.<\/li><li><strong>Staying solvent<\/strong> long-term can be impacted by ongoing cashflow issues. If you\u2019re regularly struggling to manage daily expenses, your growth will stall, you may be forced to sell fixed assets, and it puts you at risk of insolvency, business closure or bankruptcy.<\/li><\/ul><\/div><\/div>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\">Expert Tip.<\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">The liquidity ratio calculation is very simple. Divide the value of your current assets by the current liabilities.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p><strong>Liquidity Ratio Calculation Example<\/strong>:<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>$250,000 in current assets \/ $75,000 in current liabilities = 3.3 liquidity ratio.<\/span><\/div><\/div>\n\n\n\n<p>You must be able to trust the current assets and current liabilities listed on your balance sheet report. <\/p>\n\n\n\n<p>This is why <a href=\"https:\/\/arielle.com.au\/best-accounting-software-for-small-business\/\">using top-tier accounting software<\/a> to accurately record your assets, income, payroll, inventory, and accounts payable\/receivable is critical.<\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\">Important!<\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">Do not rely on spreadsheets! We&#8217;re no longer in 1998.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Current assets<\/strong> can include cash, bank deposits, money owed to you, stock on hand, raw materials, and short-term investments.<\/li><li><strong>Current liabilities<\/strong> can include bills, employee wages, supplier invoices you need to pay, taxes and loan payments.<\/li><\/ul><\/div><\/div>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\"><strong>Important!<\/strong><\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">Your business may also have a range of fixed assets (e.g., equipment, vehicles, buildings) that can&#8217;t be factored into your liquidity ratio &#8211; because they can\u2019t efficiently be traded for cash as needed.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What Is A Good Liquidity Ratio?<\/strong><\/h2>\n\n\n\n<p>Do your liabilities match your assets? That&#8217;s a 1:1 relationship.<\/p>\n\n\n\n<p>A liquidity ratio above 1 reflects that your available assets exceed your financial obligations. <\/p>\n\n\n\n<p>This means you&#8217;re in a better financial position to handle your known operational expenses.<\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\">Did You Know?<\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">A ratio of 2 (or above) is good. It shows you have 2X more current assets than bills or debts to pay. That gives you room to cover any unexpected costs that arise.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<p>If your liquidity ratio is below 1, you could be caught short and miss payments. <\/p>\n\n\n\n<p>You are at risk of seriously damaging your relationships with vendors or employees, or potentially running up further costs from penalties, fines or interest. <\/p>\n\n\n\n<p>(Unless you can find emergency cash or negotiate terms).<\/p>\n\n\n\n<p><strong>(Related: <\/strong><a href=\"https:\/\/arielle.com.au\/calculate-and-improve-net-profit-margin\/\"><strong>How To Calculate And Improve Your Net Profit Margin<\/strong><\/a><strong>).<\/strong><\/p>\n\n\n\n<p>If it\u2019s a momentary blip, that\u2019s one thing. It\u2019s quite another if your ratio is regularly below 1, because it means you literally can\u2019t afford to stay in business.<\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\"><strong>Important!<\/strong><\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">Poor bookkeeping and not being able to analyse your finances is a major contributor to insolvencies. No visibility leads to careless decision-making or overspending that eats into your profits and cash reserves.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Types Of Liquidity Ratios.<\/strong><\/h2>\n\n\n\n<p>There are three main ways to calculate a liquidity ratio. <\/p>\n\n\n\n<p>The calculations differ based on what you include in \u2018current assets\u2019:<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Current ratio: <\/strong>calculates the ratio using all of your current assets.<\/li><li><strong>Quick ratio (aka acid-test ratio): <\/strong>excludes inventory from your current assets to determine the ratio.<\/li><li><strong>Cash ratio: <\/strong>excludes everything except cash (and cash equivalents like money market fund, stocks, short-term bonds).<\/li><\/ul><\/div><\/div>\n\n\n\n<p>Current ratio is the broadest, and easiest calculation. <\/p>\n\n\n\n<p>But knowing your assets-to-liabilities ratio in the context of a narrower set of assets can be useful. <\/p>\n\n\n\n<p>(Because not all assets are equal in terms of their liquidity).<\/p>\n\n\n\n<p>Think worst-case scenario. <\/p>\n\n\n\n<p>Let\u2019s say you get an illness that puts you out of action long-term, or another global pandemic hits and the demand for all the products sitting in your warehouse dries up overnight. <\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>Would you still be able to access enough money to pay your bills?<\/span><\/div><\/div>\n\n\n\n<p>If your current ratio looks healthy, but your quick ratio falls below 1, you might be too reliant on future sales that may not eventuate.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p><strong>Liquidity Quick Ratio Calculation Example:<\/strong><\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>$100,000 in current assets ($250k assets &#8211; $150k stock) \/ $75,000 in current liabilities = 1.3 liquidity ratio.<\/span><\/div><\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Why Does Your Liquidity Ratio Matter?<\/strong><\/h2>\n\n\n\n<p>Ongoing price inflation, <a href=\"https:\/\/arielle.com.au\/interest-rate-forecast-australia\/\">reasonably high interest rates<\/a> (although easing), and a somewhat rocky global economic outlook mean that SMB owners need to be prepared in case of downturns in demand. <\/p>\n\n\n\n<p>If anything goes wrong, your cash reserves can dry up quickly.<\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\"><strong>Did you know?<\/strong><\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">Almost 90% of small businesses <a href=\"https:\/\/www.smallbusiness.nsw.gov.au\/about-nsw-small-businesses\/small-business-survey\">surveyed<\/a> by the NSW Small Business Commissioner in June said they were concerned about the cost of business inputs. Just 20% felt confident about their individual business prospects.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<p>A recent survey of over 700 Australian small-to-medium enterprises with revenues of between $1-$20 million found that <a href=\"https:\/\/www.scotpac.com.au\/research\/\">one in five businesses<\/a> believe the loss of just one key client or supplier would tip their business into failure. <\/p>\n\n\n\n<p>Over 75% said they\u2019d lose an average of around 22% in revenues if a major client departed.<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span><em>Tracking your liquidity ratio helps you maintain and improve it, which will improve your preparedness and confidence that your business can weather cash flow snafus.<\/em><\/span><\/div><\/div>\n\n\n\n<p>Also, a higher liquidity ratio is one of the indicators of financial health that will put you in a better position to secure a business loan.<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Creditors <\/strong>will analyse your liquidity ratio as part of a loan application to determine if you\u2019ll be able to manage the repayments.<\/li><li><strong>Investors<\/strong> will use the metric as a guide to whether your business has long-term viability, including enough working capital to grow.<\/li><\/ul><\/div><\/div>\n\n\n\n<p><strong>(Related: <\/strong><a href=\"https:\/\/arielle.com.au\/guide-to-capital-expenditure-capex\/\"><strong>The Ultimate Guide To CapEx For SMBs<\/strong><\/a><strong>).<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How To Improve Your Liquidity.<\/strong><\/h2>\n\n\n\n<p>Here are some tips for improving liquidity in your SMB:<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Free up cash flow<\/strong> where you can. Cut back on wasteful expenditure like subscriptions or software you don\u2019t use often, or perhaps hiring freelancers on a project basis rather than a full-time employee.<\/li><li><strong>Open a high interest savings account<\/strong> for your business. Get intentional about setting aside a portion of income regularly. It\u2019s smart to build a savings habit so you\u2019ve always got cash reserves for tax bills and emergencies.<\/li><li><strong>Aim for a leaner, just-in-time approach<\/strong> to purchasing. Be strategic with the products you keep in stock. Too much slow-moving stock can unnecessarily tie up cash.<\/li><li><strong>Negotiate your contract and payment terms<\/strong>. This will help you collect promptly on what you\u2019re owed by clients\/customers to have cash flowing in.<\/li><li><strong>Carefully manage debts.<\/strong> Think twice about using credit cards instead of cash for payments, and make sure you\u2019re making card repayments on time to avoid interest costs.<\/li><\/ul><\/div><\/div>\n\n\n\n<p>Improving your liquidity will reduce your stress, but it\u2019s also critical to being able to jump on business opportunities as they arise.<\/p>\n\n\n\n<p>For example, being able to fund the development or purchase of new product lines, or run marketing campaigns that extend your market share and long-term success.<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p>Jody<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p><span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Reading Time: <\/span> <span class=\"rt-time\"> 5<\/span> <span class=\"rt-label rt-postfix\">minutes<\/span><\/span>Not being able to pay your business\u2019 bills on time is a bad look. You\u2019ll lose credibility with vendors. Your<\/p>\n","protected":false},"author":14,"featured_media":119125,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_uag_custom_page_level_css":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[257],"tags":[],"class_list":["post-119088","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.0 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Ultimate Guide To SMB Liquidity Ratios<\/title>\n<meta name=\"description\" content=\"A liquidity ratio used to determine a company\u2019s ability to pay its short-term debt obligations. 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